BusinessDay contributing editor

There’s a subtle difference between the Reserve Bank cutting the cash rate to offset the impact of the strong Australian dollar and the Reserve Bank cutting the cash rate in an attempt to weaken the strong Australian dollar. It’s a subtly that the forex market seems to miss.

Nothing new to see here, move along – but by its flighty nature, the forex market had a little flit anyway, pushing down the dollar by nearly half a US cent. Hey, what screen jockey has the time to read to the bottom of a long Hansard entry? And once the market moves a little, it’s the movement that counts, not the reason for it.

The market is bigger than the RBA – a central bank standing in the face of the market can be trampled.

What the G, the DG and the AG all said is that, yes, they’re a bit surprised that the Australian dollar has stayed as strong as it has and that, yes, it would be nice if it was a bit weaker. But they have specifically ruled out trying to weaken it at this stage because it’s not way-too-far out of kilter.

As Stevens said, to attempt a major intervention against the massive forces of the market, the bank would have to be very confident that the market was seriously wrong.

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What wasn’t spelt out on Friday is that the RBA really can’t do much about it. The market is bigger than the RBA – a central bank standing in the face of the market can be trampled. And we can’t just cut interest rates to zero and peg our currency the way the Swiss have done, as Governor Stevens explained in an interview in December.

What the bank can do is loosen monetary policy to stimulate the economy a bit in an attempt to balance the contractionary effect of the strong dollar. The governor and his deputy were specific about that on Friday. Here’s part of what the DG, Philip Lowe, told the committee:

“I think the big picture here is we are ending up with a policy configuration of a very high exchange rate and low interest rates. The low interest rates are not specifically designed to try to get the exchange rate to come down but they are offsetting the contractionary effects of the high exchange rate on the economy.

“We are ending up with this configuration, because exchange rates are relative prices and the Australian economy is doing relatively better than the North Atlantic economies where there is very large money creationgoing on and very weak economic conditions. Those outcomes mean that their exchange rates are tending to below. If they are going to be low, someone else has got to be high, and that is us. We are responding to the contractionary effects of that with low interest rates.

“You could argue we would be better off with some different configuration: a lower exchange rate and higherinterest rates - or more normal level of interest rates - but, given the configuration of the global economy, I just do not think that is possible at the moment. The weakness in the North Atlantic and their money creation isleading to their currencies wanting to depreciate, and someone has to be high.”

From the point of view of the moment-to-moment forex market, any mention of an interest rate movement is itself good for a movement, but there’s nothing much fundamentally happening here. Move along.

Michael Pascoe is a BusinessDay contributing editor

30 comments so far

Thanks for this sensible article. I was scared by the headline this AM - hubby and I live meagerly off interest at bank - he would have freaked about that ill informed headline.

Commenter

good grief!

Location

Date and time

February 26, 2013, 11:04AM

We have read over the last year or so that foreign investors and funds have been investing in Australia, presumably government bonds and equities, but other asset classes as well. It would be interesting to see what proportion of those investments are "sticky", in that they wouldn't move quickly if the dollar did start to slide. To what extent do they represent large fund portfolio diversification as opposed to shorter term speculative investment? Getting some sort of a handle on this would give us some indication of the potential liquidity of the local currency in the near future. My gut feel is that the currency is unlikely to plummet again as it did after the GFC, as lomg as a significant proportion of the foreign investment is sticky. It would seem that Australia has become less of a speculative investment and more of a blue chip, albeit the Steven Bradbury variety.

Commenter

Bulldust

Location

Perth

Date and time

February 26, 2013, 11:11AM

I also wonder about what will 'stick'.

I'm not au fait with currency trading but I do wonder if perhaps we need to get a reward via tax of some type for providing profits to investors because of this historical bubble of returns to be had by OS people when US and Euro look so shaky.

Long termers or in and outers/

Commenter

good grief!

Location

Date and time

February 26, 2013, 11:36AM

What concerns me is the collateral damage, the businesses who have closed down, the people who have lost their jobs, the reduction of skills, the dismantling of infrastructure, the disappearing choice of Australian made products on retailers shelves, the reduced employment opportunities, the future innovations and discoveries that we will forgo because the Australian manufacturing and processing industries are being decimated. What also concerns me is that so called market forces and overseas investors whims are determining the future of this country, I don't have the confidence that either really care about future generations or how reliant we will be on others in the future to supply many of the items we take for granted now.

Commenter

BuyAustralianMade

Location

Melbourne

Date and time

February 26, 2013, 4:33PM

A strong dollar is not the root cause of Australia's competitive problem. The single biggest challenge Australia faces is grossly overvalued property. It is the root cause of Australia's competitive disadvantage. It's a cancer that is embedded in everything: wages, taxes, rents, leases, surcharges, insurance, cost of goods, production costs, research, development...everything.

A handful of Australians may be individually benefiting from obscene property prices but Australian society as a whole is suffering greatly. When the mining boom is over and there is a sudden flight of capital out of Oz then the "Great Correction" will really begin.

Commenter

Jimmy

Location

Not_Oz

Date and time

February 27, 2013, 5:24AM

But they must intervene. RBA staff's portfolio of investment properties are not doing that well.

Commenter

Butch

Location

Date and time

February 26, 2013, 11:16AM

Perhaps a tax on the interest rate carry trade profit that banks outside Australia such as China and Japan might bring the dollar back to 'normal levels'. Hopefully it would also slow imports, benefit exports/tourism and jobs...might also help if the local Oz banks passed on the interest cuts over the last that the RBA has made.

Commenter

hazza

Location

spore

Date and time

February 26, 2013, 11:46AM

Like a super profits tax, I think.

But I assure you, I have very little knowledge of how to work such things. It seems to me that all Australian taxpayers pay for our stable economic credentials and thus, some income is due for the Federal Government.

Commenter

good grief!

Location

Date and time

February 26, 2013, 1:54PM

hazza - That's one of the most sensible comments I've seen on one of these forums. Most people seem utterly blind to the damage a high AUD causes.. They're more concerned with having chapp holidays abroad!

Commenter

GlobalView

Location

Date and time

February 26, 2013, 11:32PM

I would not be worried as the aussie dollar should be around 1.10 later this year.Why?Safe haven.Austerity is failing and taking economies backwards.Money printing is not working in the us and japan will find this out as well.Unemployment and debt is getting worse so one of only 7 aaa countries australia will be piled into by investors.Triple dip for great britian sadly.